Economic Challenges for NZ in 2008

Economic Challenges for NZ in 2008 and
beyond University of the Third Age course, Christchurch

You have asked me to talk about the economic challenges for
New Zealand.

The topic reminds me of a speech I was asked
to give last year on the subject of 'what's wrong with the
New Zealand economy?'

I was able to quote the member of
the All Blacks coaching staff who wisely analysed the world
cup campaign and concluded that we didn't win the cup
because we didn't score enough points.

In the same vein,
what's wrong with the New Zealand economy is that we don't
have enough money to do everything that we want to do -
but then who does?

The crucial issue is what do we want
to do?

We are lucky in New Zealand to have a relatively
high level of consensus around the type of future we
want.

We want a New Zealand where we can enjoy a standard
of living at least comparable to that of countries we like
to compare ourselves with.

We want a future where our
young people can flourish and enjoy opportunities as
attractive as any in the world.

We want a future where we
care for all New Zealanders.

We want security from
hardship for New Zealanders, we want social services
available to anyone - schools, hospitals, safety in our
homes and on our streets.

And we want to be connected to
the best the world has to offer. If that's where we want to
beâ€¦how are we doing?

There's an old joke about the
tourist who stops in Dargaville and asks a local for
directions to Christchurch. The local looks at him strangely
and says, 'well if I were trying to get Christchurch, I
wouldn't start from here!' For much of the middle twentieth
century we did pretty well at running an economy capable of
delivering the New Zealand most of us aspired to.

Our
services were paid for with earnings from agricultural
commodities sold into a guaranteed market where we earned
very high returns.

But when the market changed we no
longer earned returns capable of sustaining our place in
the first rank of global economies.

We started to drift in
the seventies, and the gap between New Zealand and the rest
of the developed world widened in the eighties and
nineties.

That drift was the reason why some of us argued
we should stop doing things that weren't working - and start
doing things that would work better. How have we
done?

Since 1999, New Zealand has been enjoying the
longest period of economic growth since World War II.

Our
unemployment rate stands at a record-low of 3.4 per cent
compared with 4.1 per cent in Australia.

More people are
in work than ever before.

Over 370,000 new jobs have been
created since 1999.

Household incomes, wages, and profits
are all up.

Profits for firms are up thirteen per cent in
real terms.

Real, inflation-adjusted wages are up 15 per
cent.

Household incomes are up 25 per cent in real
terms.

On the first of April the minimum wage was lifted
to $12 an hour - $200 per week for the lowest paid workers
than they received from $7 an hour in 1999.

Child poverty
rates have fallen by more than at any time since the great
depression.

The cost of seeing the doctor has been halved
and the price of standard prescriptions has been cut from
$15 to $3. (I am aware of some exceptions to this framework,
which is Government policy, and I'm looking into them.)
Superannuation rates have risen, from below 60 per cent of
the after-tax, ordinary time wage in 1999 to 66 per cent
now) and public services are thriving.

Workers have access
to a minimum of four weeks annual holidays and fourteen
weeks of paid parental leave.

On April 1, a company tax
was cut, and personal tax rates for families are now so low
that if you are an average wage earner with two kids - you
virtually don't pay any tax at all. You have an average rate
of barely two percent, and that is the lowest of any
developed country.

That isn't a bad turn around from the
drift of the last decades of the twentieth century.

Of
course, if you are in the Opposition or the Business
Roundtable and you want to go back to the failed policies of
the past, you would try to find some measure that didn't
look so good.

So they say, yes all that is much better,
but we are still falling behind Australia. Is that
true?

We started to fall behind Australia in the
seventies.

We fell further, and faster, in the late
eighties.

During the nineties, the wage gap between
Australia and New Zealand grew by over 50 per cent.

Since
1999 it has grown by â€¦ 0.4 percent!!

The first
economic challenge for New Zealand was to stop the rot. And
we have.

The greatest economic challenge we have remaining
is to catch up. The reasons for us not catching up are the
greatest economic challenges we face.

For all the changes
our economy has gone through over the last twenty-five
years, our exports as a percentage of GDP have barely moved.

Our share of world trade has actually been falling.

The
imbalance between our demand for goods and services from
overseas, and our sales overseas, is vast.

We haven't run
a current account surplus since 1973.

That is, for
thirty-five years,we haven't earned more than we spend
overseas. And while we have a monetary policy that
deliberately puts the tradeable sector on the rack to
restrain house prices, we are not likely to.

With a
current account deficit as high as it is, and interest rates
as high as they are, we will continue to own less of our own
economy.

We will not climb the rankings of global
economies.

When we look at what is wrong with the New
Zealand economy, it is glaringly obvious that we need new
monetary policy tools.

The Reserve Bank and Treasury are
working on proposals as I speak.

Some of us have been
arguing the point since 1989 - and I took my share of abuse
for saying we needed more monetary policy tools than simply
crucifying the tradeable goods sector. (The NBR once
published a cartoon of me with horns on my head and
stockbrokers jumping out of windows.)

I'm now welcoming
the latecomers to the discussion over better policy tools.
But even for those of us who who would change monetary
policy so that we had a more stable and competitive
currency, there are timeless truths which we have to face:
Over time we want our incomes relative to the rest of the
world to rise, and if they do, then our dollar will surely
rise too.

We need export strategies built around
prospering with a permanently higher exchange rate.

There's an analogy with a workers' pay - if you want to
get a job you might agree to work for less. But if you want
to earn more, you need to be paid more. And so you need a
strategy that will earn you higher wages.

The same is
true of New Zealand's economy as a whole.

We can't get
richer by earning less.

If we want to increase the living
standards of New Zealanders and enjoy the standard of living
of countries we like to compare ourselves with, we have to
sell more to the world.

There are three main strands to
what we have to do: Deepen and broaden our economy. Achieve
more value from our existing competitive advantages And save
and invest more in our own economy.

The first strand is to
develop more high-value, knowledge-based industries - job
rich, high-value, high-tech sectors - that can sell to the
world products and services dependent on our unique
creativity and innovation.

We have hardly any large
multinational companies that have the scale and
sophistication to earn global incomes. We earn more of our
income from undifferentiated commodity exports (apples
versus high energy drink - powdered milk versus immune
system-saving ingredients) than any other developed country
- and it is no coincidence that we have a lower per capita
income than most first-world developed economies.

I spent
six years as Minister for Economic and Industry Development
working with sectors and regions to lift the rate of growth
and the connections our businesses have with global
markets.

There are some encouraging successes - some have
been spectacular, for example our film industry.

Others
such as biotech, IT and the creative sectors are all growing
well. But for all their success, productivity in the primary
industries has grown at twice the rate of the rest of the
economy since the early nineties.

For the foreseeable
future, only our primary industries have the global scale,
sophistication and competitive advantage to transform our
incomes. So if we want to enjoy rising living standards with
other countries we need to sell more of our primary
production to the world.

By 'more', I mean we need to earn
more from our sales to the world, not just sell more
volume.

Earning more from our primary industries is the
second of our economic challenges.

The prospects for our
primary sector are very good.

There is a growing world
demand for high-quality sustainably-produced protein. It
will only continue to grow as populations rise and become
more affluent.

Globally, the competition for agricultural
land to produce biofuels is going to work in favour of
agricultural-producing countries like ours, too.

Our
pastoral farming techniques have built in advantages. We are
more energy efficient than intensive animal farming in
Europe, America, or Asia, we typically have better animal
welfare and we are free from the negative consumer
associations with 'factory farming'.

The challenge for
our primary industries is to remain competitive. We will
need to better align our food and pastoral sectors with
trends and opportunities in global markets.

And that means
we need more innovation.

Innovation is vital to equipping
our primary sector for an age when our climate is changing.
It always takes more than one magic bullet. But science and
innovation is a necessary part of the solution.

That's
why last month the Government announced New Zealand Fast
Forward. It is the largest ever investment in science and
innovation. This is genuinely a partnership between the
government and the private sector.

The government is
putting in $700 million, which over the life of the fund
will grow to be as much as a billion. With matching industry
contributions, that amounts to two billion dollars over ten
to 15 years.

Innovation in our pastoral industries offers
the single greatest chance to achieve a breakthrough that
can restore the place we lost in the seventies, eighties and
nineties at the table of the world's winning economies.

It's an opportunity, the likes of which don't come along
very often, to change the economic destiny of New Zealand.

The third strand is to increase our returns from activity
in the rest of the world through saving and
investment.

New Zealand's savings levels by international
comparisons are very low. More savings would take
inflationary pressure off - which leads to lower interest
rates and a more stable and competitive currency.

More
savings also have the happy result of increasing the living
standards of families and individuals over their lives. Only
one in three couples and one in eight individuals have
superannuation assets. Households in low and middle-income
brackets are particularly poorly placed.

More savings
would mean better access to more of our own capital for
development.

We need to earn more from investment
overseas as well.

The largest contributor to our gigantic
current account deficit is our gigantic investment income
deficit.

In comparison, our returns from our
investment overseas are puny. We want access to overseas
capital, for the technology contributions, networks and
disciplines it provides us.

But we need to do better at
earning overseas. Compare our most successful company,
Fonterra, to a business like the German manufacturer
Seimens. It started exporting about the same time as New
Zealand, in the mid nineteenth century.

Today it is
Europe's largest engineering firm, operating in 190
countries with revenue last year larger than the size of New
Zealand's GDP: â‚87 billion, or nearly NZ$170 billion.

Eighty percent of its sales, three quarters of its
factories and two thirds of its workforce of nearly half a
million people are outside its German homeland. In other
words, that one company earns far more of its revenue
outside its home.

None of our companies are even slightly
as global in scope and integration as the European leaders.

This is important because it tells a story about the way
we earn our living and our ability to earn high value
returns.

While we have been focusing on changing trade
rules to open new markets, other countries have been
focusing on doing stuff, not just on talking and on
regulation.

We need to do better at investing in overseas
business and earning something from that.

I spoke at a
dairying conference this week where I put it this way: When
I sit down at a Christchurch pub and order a Heineken beer,
some of the price I pay goes to Europe.

The beer is
poured in Christchurch, bottled in New Zealand from hops
grown in New Zealand and the brewery that makes it is in New
Zealand. But someone in Europe clips the ticket.

They
partly collect because we borrow some of their capital. But
they also collect because we use their brand, ideas and
recipes.

If they can profit when we drink our own beer,
then we should be looking to profit more often when they
drink their own milk or eat their own milk products.

This
is a difficult issue for many of our farmers to accept. Our
instinct is to see ownership of overseas dairying as a way
of funding competition and putting ourselves out of a job.

But we need to be more sophisticated than that or we will
never maximise our returns, we will never achieve the
standard of living other countries are able to earn, and we
will always be in a defensive position. Ask yourself if New
Zealand could ever supply all the world's milk? Of course we
couldn't. But we can aspire to derive revenue even in
markets where we can't directly supply.

We can hope to do
it partly because we have a competitive advantage in growing
milk. We know a lot about how to produce milk efficiently.
Fonterra's review of its capital structure is motivated,
partly, by the need to consider structuring their business
in a better way.

But if we want, as a country, to earn
more from investment then we also need to save more.

One
of our main challenges as a country is our poor savings
rate. The government has introduced the NZ Superannuation
Fund and KiwiSaver.

Kiwisaver in particular is a landmark
piece of social and economic legislation and if enough New
Zealanders save through Kiwisaver it will reduce interest
rates, the exchange rate and it will make a substantial
difference to the strength of our export sector.

When we
look at our income gap with Australia, one of the major
explanations for Australia's success has been the trillion
dollar pool of investment funds its compulsory
superannuation scheme has created. Those super funds are
behind those Australian investment firms that keep coming
over here and buying up our most promising companies.

Of
course, one of the other big sources of investment flows out
of New Zealand is the flow of profits earned by big overseas
banks here.

In the last financial year for which figures
are available, registered banks made a net, after-tax profit
in New Zealand of $3,199 million.

Nearly all of it went
back overseas to the banks' owners.

Most of it used to
stay here in New Zealand, when those banks were owned by
us.

I predicted the investment flows would happen when I
opposed the sale of those banks - BNZ, TrustBank, PO
Savings Bank.

And I did something about it by getting
Kiwibank going.

After six years, I think we can declare
the bank a success.

I was on a television debate last week
and I asked Rodney Hide if he still thought it was a
dog.

He wasn't so keen to answer. Six hundred thousand New
Zealanders have voted with their feet and opened accounts.
They bank with Kiwibank because fees are lower and there are
branches in their communities.

And they do it because it's
ours.

Rodney was one opponent of the bank. The other was a
professor Tripe. He popped up on the radio the other day
where he was so apoplectic about Kiwibank he told a reporter
that it's "not at all clear" Kiwibank's audited, public
accounts "are in fact a fair representation of the
truth."

That is just a pathetic exercise in
self-justification.

The accounts are signed off by a
respected board, they are audited and the bank is subject to
Reserve Bank supervision.

If it were making up its
profitability, there would be an awful lot of people
involved in the conspiracy.

One of Mr Tripe's issues with
Kiwibank is that it is less profitable than big overseas
banks.

But that's the whole point of the bank.

What
that shows you is the shallow nature of the opposition to
good ideas. It shows that - no matter the evidence - there
are still people who will oppose good ideas.

I think our
main economic challenge is to avoid going back to policies
that failed us before.

When we talk about the challenges
to our economy, our challenge is to consign to the
historical dustbin of failure the failed ideas of the past
- like bringing back Roger Douglas!

Selling off assets
like Kiwibank and Air New Zealand didn't work. Slashing and
burning our economy didn't work.

Between 1982 and 1996, men
aged 15-25 took a 45 per cent cut in their real personal
income. Women in the same age range, whose incomes were
lowest to start with, took a thirty percent cut.

Is it any
wonder suicide and crime rates went through the roof at the
same time?

The lessons of history tell us that we can't
get richer as a country by selecting victims in the economy
and trying to get stronger at their expense. We can't get
richer by selecting regions, or welfare beneficiaries, or
low-paid workers and saying they need to be paid less.

The
challenge for New Zealand is to create a high-wage,
job-rich, globally connected and innovative economy that
succeeds by being better and smarter.

The alternative is a
low skill, low wage economy that competes on price. And
while an economy like that might offer some returns to a
few, it cannot deliver enough for the majority of New
Zealanders.

The globally economy is facing a real
downturn right now.

The sub-prime crisis in the US is
going to push up interest rates and slow economic activity.
It may well lead to further instability.

Energy prices
around the world will rise.

We are enduring a drought that
is going to cost our economy around $1.24 billion.

That
works out as $25,200 for the average sheep and beef farm and
$79,400 for the average dairy farm.

That's across the
whole country, but farmers in more acutely affected regions
are facing much larger losses. Some individual sheep and
beef farmers are forecast to have income reductions in
excess of $100,000. They will get overdrafts being
capitalised back into mortgages and reduced equity at a time
when interest rates are high.

Last time we experienced
similar global ripples, coming on top of a drought, the
economy went into a recession. The government then responded
with a package of income and services cuts.

It included
reductions in the floor or New Zealand Superannuation down
to 60 per cent of the average wage, compared with 65 per
cent where it had previously been set.

I believe the
coming downturn will show the wisdom of building up the
strength we have.

Our public accounts today are in better
shape than most other countries'. Our government debt levels
are much lower. We have invested strongly in infrastructure
projects. We are better placed to ride through the storm.
And we will be able to do so without weakening New Zealand
or by failing to take care of our communities.

So I think
we are well placed to meet the challenges
ahead.

Everywhere you look around the world where
economies have been successfully transformed to the benefit
of their people and their communities, the pattern has been
the same.

It has been without exception, where the
Government has worked alongside industry.

That is why
development and innovation has been a passion and a priority
for me for nine years in government.

We need a stronger
New Zealand if we are to be a more caring New
Zealand.

That's our main economic challenge, and I believe
we are meeting it well.

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